Trying to Stop a Bull Market Has Risks

U.S. stocks have been on a tear. The S&P 500 Index has climbed a surprising
20 percent so far this year, as a global synchronized recovery takes shape
and funds flow back to equities. As I often say, investors take risks when
they try to stop a bull run, and plenty of data suggest you might regret taking
that action this year.

Consider the optimistic views from Joshua Brown, i.e. The Reformed Broker,
as we have "all the rocket
fuel we need for an explosion." There's no election, no war in Syria, and
no taper talk. Banks are highly capitalized, stocks around the world are cheap
and hedge funds' short positions are the highest since January, says Brown.

If his post doesn't convince you, we have even more ammunition, especially
regarding cyclical and growth stocks.

1. Year-to-date returns of more than 20 percent are not abnormal

Did you know going back to 1900, the market's annual returns have been more
than 20 percent about one-third of the time? Take a look at the distribution
of S&P 500 annual returns charted by Mebane
Faber Research, which shows the possibility of stocks going higher.

If you were able to invest in the market during the entire 112 years, you
would have pocketed an average of 11 percent. But even though the 2013 market
return has been more than the average, there were more than 30 years when stocks
increased more. Of course, we can't guarantee future performance, but history
has seen years when stocks increased 25, 30 or even 40 percent over the entire
calendar year.

2. Improving economic growth prospects point to cyclical stocks to lead the
way

Last spring, our director of research, John Derrick, CFA, recognized an
inflection point occurring in U.S. stocks, with cyclical areas of the
market beginning to gain strength while defensive companies suddenly started
lagging. Large-cap, relatively stable companies such as Procter & Gamble,
AT&T and Clorox dropped sharply at that time. If you watched the market
closely, you sensed a mean reversion taking place as expectations seemed
too lofty for defensives and too gloomy for cyclicals.

This was a vital signal to growth investors, and those who were paying attention
to the quiet ignition of cyclical stocks were wise to take advantage of this
change.

On the chart below, you can see the abrupt switch in leadership from defensive
stocks to cyclical sectors. The line plots the ratio of cyclical areas to defensive
areas of the S&P 1500 Index. When the line is rising, cyclical companies
(consumer discretionary, energy, financials, industrials, materials and technology)
outperform; when the line is falling, defensives (consumer staples, health
care, telecommunications and utilities) outperform.

Over the past decade, you can see that cyclical stocks outperformed from 2002
through 2005. But since the end of 2010, the longer-term trend for cyclicals
has been heading downward--until recently. Now, after a prolonged period of
underperformance, cyclicals appear poised to outperform.

John continues to believe that with countries such as the U.S., Europe and China improving,
cyclical and high-growth areas of the U.S. market will likely continue to take
off. As investors have been reallocating out of bonds and cash into equities
on expectations that interest rates may rise, chances are good that this money
will find its way into cyclical areas of the market.

3. Rising industrial production is positive for cyclical stocks.

As a measure of output of the industrial sector, industrial production (IP)
around the world has been building momentum. In August, the IP in the U.S.
and the eurozone grew more than anticipated. In September, China's IP rose
10.2 percent, which is the second-highest growth rate this year, according
to China Daily.

Historically when the economy has had positive industrial production momentum,
a higher percentage of cyclical companies experienced better-than-expected
earnings. And companies that beat earnings typically experience a boost in
stock prices.

There appears to be plenty of gunpowder in the chamber for growth stocks.
Like I said above, trying to stop a bull market has risks. With $32 billion
pouring into equity funds in September and another $12.7 billion into stock
funds in one week in October, many investors are jumping into the market. What
action are you taking?

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John Derrick, CFA, director of research, contributed to this
commentary.

Frank Holmes is CEO and chief investment officer of U.S. Global Investors,
Inc., which manages a diversified family of mutual funds and hedge funds specializing
in natural resources, emerging markets and infrastructure.

The company's funds have earned more than two dozen Lipper Fund Awards and
certificates since 2000. The Global Resources Fund (PSPFX) was Lipper's top-performing
global natural resources fund in 2010. In 2009, the World Precious Minerals
Fund (UNWPX) was Lipper's top-performing gold fund, the second time in four
years for that achievement. In addition, both funds received 2007 and 2008
Lipper Fund Awards as the best overall funds in their respective categories.

Mr. Holmes was 2006 mining fund manager of the year for Mining Journal, a
leading publication for the global resources industry, and he is co-author
of "The Goldwatcher: Demystifying Gold Investing."

He is also an advisor to the International Crisis Group, which works to resolve
global conflict, and the William J. Clinton Foundation on sustainable development
in nations with resource-based economies.

Mr. Holmes is a much-sought-after conference speaker and a regular commentator
on financial television. He has been profiled by Fortune, Barron's, The Financial
Times and other publications.

Please consider carefully a fund's investment objectives, risks, charges and
expenses. For this and other important information, obtain a fund prospectus
by visiting www.usfunds.com or by calling
1-800-US-FUNDS (1-800-873-8637). Read it carefully before investing. Distributed
by U.S. Global Brokerage, Inc.